Johnson's Tree Farm has a cash balance of $33 and a short-term loan balance of $200 at the beginning of quarter one. The net cash inflow for the first quarter is $89 and for the second quarter there is a net cash outflow of $44. All cash shortfalls are funded with short-term debt. The firm pays 2 percent of its prior quarter's ending loan balance as interest each quarter. The minimum cash balance is $25. What is the short-term loan balance at the end of the first quarter?

Question

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The correct answer is A. The short-term loan balance at the end of the first quarter is $107.Explanation:The net cash inflow for the first quarter is $89. This means that the cash balance at the end of the first quarter is $33 + $89 = $122. The minimum cash balance is $25, so the firm needs to borrow $122 - $25 = $97 to meet the minimum cash balance requirement. The firm pays 2 percent of its prior quarter's ending loan balance as interest each quarter. The prior quarter's ending loan balance is $200, so the firm will pay $200 * 0.02 = $4 of interest in the first quarter. This means that the firm will need to borrow $97 + $4 = $101 to meet the minimum cash balance requirement and pay the interest on the loan. The short-term loan balance at the end of the first quarter is $200 + $101 = $301.

Johnson's Tree Farm Has a Cash Balance of $33 and a Short-Term